A realistic alternative to QE 2

The results of the most recent and much anticipated Fed meeting are out. The Fed is going to purchase $600bil in bonds through June 2011 to help stimulate the economy by flattening out the middle of the yield curve. The hoped for stimulus resulting from this move will be lower mortgage and interest rates which will theoretically make it easier for small businesses to get loans for expansion and eager home buyers to get a piece of the American Dream. Not sure how that will help stimulate employment though. From my vantage point, it doesn't matter how low mortgage rates go if nobody will refinance or lend to you without a job. And with few exceptions, I'll wager not many small businesses are eager to expand in the current political climate. From a saver's point of view, with money market rates already well below 1%,  it's not like anybody is going to go out and buy a Chevy Volt off their earned interest. It's hard not to conclude that if the Fed continues down this path they are going to lose credibility in the not too distant future; at which point, "...backed by the full faith and credit of The United States of America"--the phrase that underpins our debtor nation--will be worth less than a wooden nickel.



In his most recent letter to investors, Paul Tudor Jones suggests that the Fed continues to treat the symptoms and ignore the structural problems of our economy. The structural problems, he argues convincingly, revolve around the six million manufacturing jobs lost overseas in the past two decades and the artificial suppression of the renminbi/US dollar (RMB/USD) exchange rate by the Chinese government. For example, on 1-JAN-94 China devalued its currency 50% in a single day, which essentially kicked off their manufacturing boom. The IMF implies the RMB could be undervalued by as much as 30% or possibly even 60% in absolute PPP.

With the help of Macroeconomic Advisers, he goes on to compare the likely outcome of the Fed's current program of large scale asset purchases (LSAP) against a two-year bilateral 30% revaluation of the Chinese RMB versus the USD. In case you don't have the time to read the entire letter, his conclusions are summarized below:

1. The most effective way to attack the unemployment problem in the US is through a revaluation of the RMB and the currencies of its associated trading partners. Relative to baseline, this approach is estimated to create three million additional jobs and to reduce the US unemployment rate by 1.4% by 2014.
2. The Fed's LSAPs will have minimal impact on unemployment that completely fades to zero by 2015.
3. A revaluation of the RMB and other Asian currencies, which would result in an 8.5% depreciation of the trade weighted dollar against all trading partners, is almost six times as powerful in reducing unemployment as the Fed's $1+trillion worth of quantitative easing.